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September 28, 2006Emerging markets have sustainability potential

London, UK (GLOBE-Net) -- Companies operating in emerging markets often lag behind their first-world counterparts in terms of managing environmental and social impacts. But practicing responsible investment techniques in developing countries still provides investors with an opportunity diversify their risks and reap returns while promoting sustainable development, says a new report.

The report by Ethical Investment Research Services (EIRIS) surveyed 50 major emerging market companies and found that most addressed some environmental, social and governance issues in their public disclosures, and some had well developed policies in these areas. Overall the report shows that most emerging country markets have yet to fully embrace the concepts of environmental and social governance.

Emerging markets evaluated included: South Africa, Turkey, Malaysia, Brazil, Israel, India, South Korea, Mexico, Hungary, Thailand, Russia, Poland, China, and Taiwan. The survey showed that South Africa leads the way in disclosure of corporate responsibility activities. Some countries, such as China, "have yet to produce strong evidence in this area," it concludes. Other countries excel in some areas but fall behind in others; Taiwanese companies showed poor governance performance, but did address many environmental concerns.

While some firms in high impact industries such as oil and gas or mining scored surprisingly well, others have perhaps been complacent or have not faced "sufficient social pressures to address their environmental impacts," the report says. For example, only 15 of the 50 companies included in the report achieved a rating of more than five out of 10 on environmental issues. Ratings were calculated using EIRIS' methodology based on analysis of criteria for environmental, social, and governance performance.

In some sectors, the difference between emerging markets and developing markets was less pronounced. In the banking sector, emerging market firms scored an average of 5.2 out of 10, compared to a score of 6.5 for banks in developed markets.

However, oil and gas producers in emerging markets scored 3.6 for overall corporate responsibility, compared to 8.3 in developed markets. In the chemicals industry, emerging market firms scored 1.6 versus 7.7 for developed markets.

Until recently, the conventional view among investors was that sustainability concerns in emerging markets were often subordinate to the pursuit of economic growth. Emerging markets were also seen as high risk, volatile, and prone to political or economic uncertainties.

That view has been changing however, as investors are increasingly seeing developing countries as areas with the potential for high returns through economic growth. As well, international financial institutions are seeing the development possibilities of promoting responsible investment in emerging markets and are directing funds towards firms that provide the social and environmental benefits that can help create sustainable growth.

The report notes that the International Finance Corporation (IFC) believes that responsible investment criteria can be applied the same way in emerging markets as they are in the rest of the world. "Responsible companies are better managed, have access to new markets, face fewer risks, have better branding and reputations and have more loyal and better-trained workforces," says the private sector arm of the World Bank.

Further, misconceptions about the limitations of responsible investment strategies in emerging markets should not be used to support a business case against such investments, argues the IFC. The IFC is the world's largest investor in emerging market equities, directing one hundred percent of its US $1.1 billion investment funds towards developing countries.

Still, the report cites an IFC calculation that only 0.1 percent of responsible investment firms are invested in emerging market assets. The two key barriers to increased responsible investment activity are a consideration of emerging markets as a 'block' to any responsible investment activity, and the fact that environmental, social and governance risk analysis is often hindered by limited disclosure on the part of companies or state authorities.

One reason that responsible investment now makes more sense in emerging markets such as India and China is that the social and environmental impacts of rapid economic growth are becoming matters of increased concern to governments, businesses, and the general population. Strains on natural resources and deteriorating environmental conditions means companies in these areas are being held more accountable for their actions.

Corporate responsibility varies widely in developing markets and is virtually non-existent in China, states the survey, despite the fact that China is now facing severe environmental issues brought on by rapid industrial growth. Some companies in other countries stand out, and leading firms are now recognized by global indicators such as the Dow Jones Sustainability Index.

Apart from some initiatives by financial institutions and specific funds, responsible investment analysis remains under utilized in developing markets, says the report. There remains a "well of unfulfilled potential," and applying responsible investment can provide "good returns for the investor and be instrumental in encouraging the adoption of socially and environmentally beneficial business activities," concludes EIRIS.

The full report, Broadening horizons for responsible investment, is available here (PDF)click here.